Question

(5 marks )

Ernst Ltd provides a bundled telecommunications service contract to Arthur Ltd. It charges Arthur Ltd $35 000 for the initial connection to its network and two ongoing services – access to the network for one year and ‘on-call troubleshooting’ advice for that year. Arthur Ltd pays the $35 000 on 1 July 2019. Ernst Ltd determines that, if it were to charge a separate fee for each service if sold separately, the fee would be:

Connection fee	$10,000
Access fee	$17,000
Troubleshooting	$31,000

The end of Ernst Ltd’s reporting period is 30 June each year.

Required:

1. Prepare the general journal entries to record this transaction in accordance with AASB 118 for the year ended 30 June 2020. Show all workings.
2. What do you understand by the Measurement of Revenue under AASB118

Answer 1

a.

Particulars	Fair Value of each Component if Sold Separately	Allocation of Fair Value to Total Consideration	Allocated Amount
Connection Fee	$10,000	$10,000 / $58 000 x $35,000	$6,034
Access Fee	$17,000	$17,000 / $58 000 x $35,000	$10,259
Troubleshooting	$31,000	$31,000 / $58 000 x $35,000	$18,707
Total	$58,000		$35,000

At the Inception of the Agreement (01/07/2019):

DR Cash   $35,000

CR Revenue – Connection Fee $6,034

CR Deferred Revenue – Access to network $10,259

CR Deferred Revenue –Troubleshooting $18,707

The Deferred revenue for each of the undelivered elements (i.e. the ongoing Access and on-call Troubleshooting) will be recognised when those services are delivered. Because these are available to Arthur Ltd continuously over the period of the agreement the revenue should be recognised in accordance with AASB 118 (i.e. on a straight-line basis).

Since this agreement is for 1 year Ernst Ltd would record the following over the year ended 30 June 2020:

DR Deferred Revenue – Access $10,259

DR Deferred Revenue – Troubleshooting $18,707

CR Revenue $28,966

b.

Revenue shall be measured at the fair value of the consideration received or receivable.

The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity. In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable.